Adam Smith's Lost Legacy

GavinK9 AT gmail DOT com

Tuesday, May 30, 2006

Adam Smith's Future in Modern Economics

Most academic economists today would dismiss Adam Smith as a mere ‘literary economist’; many are not sure about the economist bit. Flipping through a copy of the Wealth of Nations, and not finding a single mathematical equation among nearly a million words of text, is enough to dissuade busy students of economics and their adult tutors from making an effort to read beyond the title page and, perhaps, flick through the index. Of course, every economist has heard of Adam Smith, and so have most of the chattering classes that pass for today’s groupie intelligentsia.

Politicians, journalists, tv presenters and lobbyists mention his name regularly and select from one of a few famous, but well-worn, quotations attributed to him to give themselves an air of profundity, especially undeserved when they misuse his name in pursuit of ends, many of which its author never intended and, living in the 18th century, could know nothing about.

A secondary objective of Lost Legacy is to expose as many of these misattributions as possible. It is not my main objective, as it can get repetitive if I try to comment on all of them on a daily basis, and it detracts from my current objective of completing my new book on Adam Smith’s economics and philosophy.

Rather than mainline on the errors of modern commentators, many of them of little consequence because the fads of modern media moguls will pass the same way as yesterday’s gossip, celebrity scandal and today’s newspapers, I would rather concentrate on the few commentators that are of consequence, in scholastic terms, and on the many modern economists whose talents are presently directed towards the fantasy world of abstract mathematics that excludes people by assumption (in the case of growth and development it often excludes technology, even knowledge) and has few lasting policy implications. Beyond the theory of comparative advantage (1818), abstract reasoning has little of permanent value to show for its efforts, though it has created a magnificent world that attracts the best minds in the field, some focussed on hyper-specialist sectors that occupy small portions of its landscape, and few with wider vision, but of no greater long-run relevance.

Adam Smith had much to offer both in terms of scientific method and practical outcomes of his inquiry into the existing 18th century social and economic system. When more modern economists re-examine that legacy, not to mimic its recommendations – the interventions into the Natural Order of the 18th century have been overtaken by modern forms that change almost totally the environment in which the Natural Order is repressed – but to apply the methods of scientific enquiry that Smith excelled in, their contributions may have an impact beyond their current efforts, in which each new school overturns the old, until overturned itself by the next big new thing, with the problems remaining in that unfinished agenda that we know as human society.

The philosopher’s role is not to change the world, but to understand it by doing nothing, but observing everything. The key word here is ‘observe’. Economists in their contributions should ‘look out of their windows’ occasionally. Human societies do not move like planets, nor like molecules or DNA, which movements may be mapped with mathematical precision. The people in societies move, as Smith put it under laws of motions determined by themselves. Ascribing self-interest to humans to develop determinate solutions to their behaviours is ‘not enough’ because the self-interest of individuals is mediated by the need to accommodate their self-interest to those with whom the individuals interact.This takes me to a theme I have worked on for sometime; aspects of it are discussed in ‘Adam Smith’s Lost Legacy’ (Palgrave, 2005) and also on occasion here. Smith correctly identified the common method of mediating differing self-interests of individuals as ‘bargaining’. This phenomenon preceded Smith by millennia; it follows him by centuries through to today. The bargaining process is a niggling problem for modern economics. It has not managed to map it mathematically through all the years of marginal analysis, neo-classical and post-neo-classical analysis.

John Nash claimed to have solved the bargaining problem, but what he solved was the bargaining outcome and not the bargaining process (he eliminated the process by his assumptions). Attempts to solve the latter by economists (Zeuthen, Hicks, etc.,) failed. Hence, the central most common behaviour in markets, organisations, families and societies remains outside the ambit of abstract economics still, after over 200 years since Smith wrote about it. I am interested in why, and what might be the remedies. The answer, whatever it is, will not be found in the arguments of functions, but might be in the arguments of bargainers (of which I have done my fair share of observing).

That is my future agenda for Lost Legacy (with occasional comments on misquoters).

Monday, May 29, 2006

James Hutton, geologist and Friend of Adam Smith

Fordyce Maxwell (the paper’s agricultural correspondent – though that severely underestimates his journalistic savvy, local wit and experience) - reports in The Scotsman (29 may) on more evidence of the slowly reviving public consciousness of Scotland’s finer days during the 18th century Enlightenment. The occasion is the opening up of the James Hutton trail in rural Berwickshire, south of Edinburgh.

Relatively unknown out of Scotland, James Hutton was a founding author of the science of geology. He was the first to write about the age of the Earth being measured in millions of years and not in the ridiculously short space of 6,000 years at that time preached by the Churches on the authority of what they claimed was ‘God’, no less. I believe this date is still believed with passionate intensity by some strains of religion.

James Hutton, largely unnoticed at the time, gave his reasons based on observation of rock formations. He published his Theory of the Earth in 1787; it did not sell well; in fact it is hard to find now, and originals sell for hundreds of pounds the last time I looked for a copy on the web.

So what, I hear you say? Well, James Hutton was also a close friend of Adam Smith, often in his company and often sharing walks in Holyrood Park in Edinburgh, the site of a former volcano (extinct for 5 million years – I hope). Hutton had a house on a nearby ridge. I have been reading about James Hutton recently and discussing his work and his influence on Smith with Norman Butcher, an academic colleague, like me now retired, but also very active intellectually.

Smith had a theory of the history of society and in many places throughout his works reveals an understanding of social evolution quite remarkable given the paucity of information about pre-history in his days. Interesting in this context, Charles Darwin, after completing the Beagle voyage took the time to read ‘Wealth of Nations’ to see what political economists were saying about the past prior to his developing his evolutionary theories based on the scientific evidence he had found in nature during the Beagle voyage, as if to give himself the confidence to pursue the realism of his revolutionary science of natural selection.

James Hutton’s many conversations with Adam Smith are not recorded but given Hutton’s interests, which besides geology included farming and land improvement (he was a gentleman farmer practising what he studied), moral philosophy (he wrote a 3 volume book on the subject which he must have discussed with Smith) and chemistry, were typical of the range of thinkers in the Enlightenment. We know that Smith enjoyed conversations on scientific subjects and both men must have influenced each other’s thinking. So much so, that Smith made James Hutton one of two of his Literary Executors (the other was Joseph Black, the renowned chemist who discovered latent heat).

Extracts from Fordyce Maxwell’s article summarise aspects of Hutton’s scientific persona:“Aubrey Manning, emeritus professor of natural history at Edinburgh University, is an admirer of a man he calls "an intellectual giant".

There has been renewed interest in Hutton in recent years and Manning was speaking at the most recent, the official opening of the James Hutton Trail in the Reiver farm shop close by Slighhouses farm. He was an exponent of the scientific method, said Manning, going solely by the evidence and never beyond, never producing a complicated answer when a simple one would do.The result was his theory, first delivered to the Royal Society of Edinburgh in 1785, which showed how the formation of landscape was an endless cycle of deposition of sedimentary rock, subsequently raised, buckled and broken by immense subterranean upheaval, then worn down by erosion.Such processes would require millions upon millions of years, ca'ing the legs from religious belief in an earth 6,000 years old and counting.If only, that thought again, his attempted written explanations had been easier to grasp, Manning admitted: "He was not the clearest of writers." He produce[d] his, now famous, phrase: "We find no vestige of a beginning - no prospect of an end."But I like to think that his early efforts on a Borders farm, tackling what until recently were still seen as the priorities of ensuring secure field boundaries, good drainage and fertile fields - up to 400 two-horse loads of marl per acre - not only helped shape his thinking, but contributed to a rounded personality.”

Co-authors of Wealth of Nations?

The New Economist Blog (28 May) comments on a piece by Greg Mankiw: “why are co-authors so important?”

“Why are co-authors so important for the way I work? One reason is found in Adam Smith's famous story of the pin factory. Smith observed that the pin factory was so productive because it allowed workers to specialize. Research is no different--it is just another form of production. Doing research takes various skills: identifying questions, developing models, providing theorems, finding data, expositing results. Because few economists excel at all these tasks, collaborating authors can together do things that each author could not do as easily on his own. In manufacturing knowledge, as in manufacturing pins, specialization raises productivity. (The puzzle is why Adam Smith chose to ignore his own analysis and write The Wealth of Nations without the benefit of a co-author.)

"The puzzle is why Adam Smith chose to ignore his own analysis and write The Wealth of Nations without the benefit of a co-author.)"

Research is slightly different from writing a report of a 12 year inquiry into the nature and causes of the wealth of nations. In academic research you are usually working on original data to add to the knowledge base. Here a division of labour between the authors has the advantages you identified.

Smith was working with many 'co-authors' through his use of their earlier works in the forms of the books and pamphlets they wrote and published. Each provided a piece of knowledge that Smith used to mine the knowledge base for the data he needed to develop his own work.Wealth of Nations contains the work of many scores of other authors. Smith did not invent, discover or create the works he used to arrive at his own conclusions. No work of such a scale is the undivided labour of one author.

In a research project, which by design are narrow, limited and non-enclydopedic, the small team of authors, each a specialist in a part if not the whole, there is an active division of labour; in Wealth of Nations the division of labour is passive (many of the authors Smith drew upon were dead, including the hundreds of references to the writings of classical Rome and Greece).A research team too, uses the labours of passive particpants - its mandatory literature review, for example.Hence there is no 'puzzle' about Smith and his lone authorship. Indeed, some (Schumpeter, Rothbard and Rashid) accuse Smith of plagiarism, an unfair and misleading accusation in my view.

Sunday, May 28, 2006

Invisible Hand no 35

For today’s exhibition of ill-informed journalism using Adam Smith in pursuit of a very unSmithian view of the world we have this editorial from The Telegram (‘the people’s paper’) published St John’s, NewFoundland, Canada (28 May)

“Harper follows ‘invisible hand’ policies”:“Second, it shows Harper is prepared to act on beliefs that are very much in tune with philosopher Adam Smith, a Scotsman who died some 216 years before Harper was elected. Smith introduced the phrase “invisible hand” to describe the unseen force unleashed by the free market.Smith believed this “invisible hand” would operate only when each person worked for the benefit of himself, without worrying about anyone else. When everyone focused on improving their own lot, he argued, the whole society ended up benefiting — similar to the economic notion of a rising tide lifting all boats.”CommentWhat a travesty of Adam Smith’s philosophy and political economy that is! No, he did not believe such selfish nonsense (the editorial writer confuses Smith with Bernard Mandeville, 1724: The Fable of the Bees).

Individuals could work for themselves and create a living hell for others. The Enron example ruined thousands o innocent people by their bosses 'improving their lot' without 'worrying about anybody else'. A thief ‘improves his own lot’, so does a polluter, and a rapist. Smith, a Moral Philosopher, never wrote such crass nonsense. It depends upon what the individual does, not the mere fact that he seeks ‘only’ to improve his own lot by ‘benefiting himself’. There is a clear difference. And educated journalists - editors to boot - should know better.

Society may end up benefiting from individuals focusing on improving their own lot, but it depends upon what they are doing. In the single case he discusses in Wealth of Nations (p 456), he is talking about individuals who prefer to invest their scarce money locally and not at a great distance with strangers. This natural concern for the safety of their money had the effect of developing their locality quicker than if they sent their investment elsewhere.

Should they fritter their income away instead of investing it anywhere they may ‘improve their lot’ by living in luxury, frequenting the comforts of taverns, whorehouses and drug dens, this would hold back economic development. Hence, it depends, as always, on the specifics.

Saturday, May 27, 2006

Smith on Morality

Here is a typical sentence from Lawrence Kidlow, an accomplished US columnist, that manages to state convincingly something that is not quite true – and in a real sense is absolutely misleading – yet is half true, but not in the way it is presented:

“A couple hundred years ago, in his "Theory of the Moral Sentiments," Adam Smith contended that capitalism requires a moral and ethical center if it is to function effectively and to the benefit of all.”

My problem with this sentence is that Adam Smith did not write about ‘capitalism’, a system as yet in 1759 when he wrote ‘Moral Sentiments’, based on lecture notes he had delivered in his Edinburgh public lectures from 1748-51 and at the University of Glasgow from 1751. He certainly wrote about morality and how it evolved in human society, and how it was a necessary social habit, under the rule of law, if society was to survive as a harmonious success and not become a vicious failure.

But his insights and his vision (the ‘impartial spectator’, the mediation of conflicting interests, the unintentional petty foibles of humans that worked to stabilise the love of justice that prevented society dissolving ‘into atoms’) were not aimed at any particular social or economic system. True, he saw them at the most advanced in the ‘Age of Commerce’, his ‘Fourth Stage of Society’, but this had nothing specifically to do with a society, the capitalist economy, first mentioned as such in 1854 (Thackery), and not recognisable to an 18th century Moral Philosopher, who, along with his contemporaries, had no notion of what was about to happen some decades after he died in 1790.

Smith’s Moral Sentiments are universal; they apply to all societies; if their bounds are breached then man would enter the company of other men as if entering a lions’ den (Smith took the metaphor from Montesquieu). So by extension, Lawrence Kidlow is right: ‘Moral Sentiments’ applies to our capitalist centuries too, but he is wrong to root that application in the writing of Adam Smith.

He is partly right in the following:

“Indeed, ownership is a self-help virtue, and it is held in much higher cultural esteem than the vice of government-dependant welfarism. This investor culture has at its core the very same ethical foundation that Adam Smith wrote about in 1759.”

The aspect in which I consider him wrong his in his cleavage to separate the investor culture, where morality must obtain if it is to survive – an investor community of cheats, liars and fraudsters would collapse in corruption and its sources of people’s savings would diminish (honesty, trust and the delivery of promises are part of morality), from that part of society which depends upon ‘government-dependent welfarism’.

The same habits of morality must also apply in the operation of state welfarism, if it is to survive (with all its blemishes) without collapsing in expense, mass fraud, cheating and petty thieving. To assert that welfarism is more susceptible to fraud, cheating and crime is overdoing it, when compared to the investor community.

Just as the men of Enron are not typical of the investor community (though their crimes are of a higher magnitude), so are the petty criminals on welfarism. In fact, because those on welfare programmes live check by jowl with a criminal class (drugs, prostitution, household thefts, and so on – the poor are often the worse sufferers from living among thieves) they are often mixed with the morally deviant in the public image.

I think it is in this area that Lawrence Kudlow strays from accuracy in his portrayal of the moral basis of investment (much of what he says I agree with). So when he concludes that “Looking down from his perch in heaven, Adam Smith would be very proud”, I am inclined to believe that Adam would also be frustrated that Mr Kidlow didn’t quite get his main point about the need for morality in any society; but then Adam, by now, must have got used to his successors’ way with his ideas, tending as they do to stretch them beyond the context in which he originally placed them.

Read Lawrence Kidlow’s article at: either Human Events Online: The National Conservative Weekly Washington DC, or National Review Online, New York

Friday, May 26, 2006

If you Dish it Out, You Must also Take It

David Warsh replies (brilliantly) to my comments on his Blog, www.economicprincipals.com. about his new book, Knowledge and the Wealth of Nations. I reproduce it here in the interests of balance. My two longer, rather too robust, pieces are below.

Gavin Kennedy, emeritus professor at Edinburgh’s Heriot-Watt University and blogger at Adam Smith’s Lost Legacy, is upset (May 23 entry) that Knowledge and the Wealth of Nations doesn’t do justice to the subtley of the views of Adam Smith. It most certainly does not. But then that is not what the book is about.

What it is about – how formal methods, mathematics in particular, have enabled economists to move beyond the ambiguities in the work of early literary economists, Smith in particular, to a demonstrably clearer understanding of the world — Kennedy airily dismisses with a wisecrack. “Of the controversies over the maths of competing economic growth theories, I shall say nothing. Like the sex life of a rhinoceros, they are of compelling interest only to other rhinos.”I am more interested than most in Smith’s genius — did he or did he not actually visit a pin factory? — but from the first word of its title on, Knowledge and the Wealth of Nations is about knowledge, meaning all that has been grasped by the human mind, and the effect of its growth on human well-being. The punchline, derived from mathematical economics, is that the economics of knowledge differs profoundly from the economics of things (and, for that matter, of skilled people), in that knowledge is nonrival: it can be copied and used in many different activities and by many different people at the same time.

Thursday, May 25, 2006

Great News for the Truth About Adam Smith

Prospect Magazine, London, UK, June

Iain MacLean interviews Adam Smith in a scene from the University of Glasgow. It is the best short guide to the policies of the real Adam Smith, incomparably more accurate than most of the claims about Smith that appear in the world’s press and which I comment on here regularly.

If the article represents the content of the eagerly awaited (by me anyway) new book from Iain MacLean due out on 22 June, Adam Smith: Radical and Egalitarian, Edinburgh University Press, then the book deserves to do very well.

On the basis of this article, I found little in Iain MacLean's approach with which I disagree. MacLean is spot on dealing with the alleged theory of the Invisible Hand, Laissez-Faire, Capitalism and the boundaries of the State, so often presented misleadingly by many authors (see my review of David Warsh’s recent, readable, but often wrong, new book earlier this week).

What a pleasure to read an account of Adam Smith with which I agree in almost all parts. I especially liked Iain Maclean's elaboration on a theme in my ‘Adam Smith’s Lost Legacy’ (Palgrave 2005) of the real reason why Smith did not complete his 31-year old promise to publish his book on Jurisprudence.

This was due to his prudence that such a book would cause offence to the constitutional monarch in that he was bound to appraise positively the US rebellion and the US Constitution in terms of Liberty; or if he said nothing about it, he would offend his own principles. The need for prudence was occasioned by the unforgiving reaction of the British establishment to acts of, or sympathy for, rebellion. That his prudence was justified in light of the reactions against his Works following the French Terror in 1793 and the judicial investigations into his friends’ conduct.

Iain MacLean advances the idea that Smith would be sympathetic to New Labour in Britain. I will await my reading of his book before commenting on this theme. You can order Iain MacLean’s, Adam Smith: Radical and Egalitarian, from Amazon.

Wednesday, May 24, 2006

Pleasant Thought and Arithmetical Errors

Robert J. Samuelson writes ‘Behind the Birth Dearth’ in the WashingtonPost.com. It is an informative article. It compares birth rates in developed countries, which have fallen below the natural replacement rate of 2.1 children per woman.

An exception is in the USA. However, he gives a curious statistic:

“American fertility is roughly at the replacement rate, 2.1 children per woman. Nor does the U.S. rate merely reflect, as some think, a higher rate among Hispanic Americans. The fertility rate is 1.9 for non-Hispanic whites and about 2 for African Americans, reports demographer Nicholas Eberstadt of the American Enterprise Institute.”

If the fertility rate is 1.9 for non-Hispanic whites and about 2 for African Americans, then some other group(s) of Americans must be greater than 2.1, because by averaging the total of all groups on this basis it must pull the average down to 2.1 and no average of 1.9 and 2 can produce a group average of 2.1. This means some group(s) of Americans is above 2.1, and if it is a minority group (where the total is not divided equally among the three groups mentioned), it must have a average well above 2.1.

Samuelson does not give the fertility rate for Hispanic Americans. Hence, I cannot see why he criticises the notion that the US the 2.1 rate is pulled up by the fertility rate of Hispanic Americans, if they are the missing group. I have no axe to grind about which group pulls the national rate up above 2.1, but there is something wrong with Samuelson’s argument here.

I did like his concluding sentence in his concluding paragraph:“By not having children, people are voting against the future -- their countries' and perhaps their own. It is easy to imagine the sacrifices and disappointments of raising children. It is hard, try as people might, to imagine the intense joys and selfish pleasures.

People ignore Adam Smith's keen insight: "The chief part of human happiness arises from the consciousness of being beloved."

Tuesday, May 23, 2006

Part Two of a Review of 'Knowledge and the Wealth of Nations'

Review of David Warsh, ‘Knowledge and the Wealth of Nations: a story of economic discovery’, Norton & Co. New York, 2006

Part Two

I have now completed the book. It is a good read and will be enjoyed by both specialist economists and general readers alike; the former will know the theories Warsh refers to and the latter can get an idea of the theories from his verbal account of them. It also sparked my interest in re-looking over a few of the theorists’ models of growth from my student days, which says something about its ability to get at least this reader’s attention.

However, my disappointments, as expressed, perhaps a little too brusquely, in Part One after I had read six chapters, are not totally assuaged now that I have reached chapter 27 and the book’s conclusions. Of the controversies over the maths of competing economic growth theories, I shall say nothing. Like the sex life of a rhinoceros they are of compelling interest only to other rhino’s.

David Warsh presents a version of Adam Smith at variance to what Smith wrote about. If his book did not mention Adam Smith at all it would be a good read, but if a reader has read Adam Smith his mentions by Warsh are irritating in the extreme. Consider:

‘Ever since Adam Smith the most important proposition in economics has been the proposition that, left to their own devices, individuals will pursue courses that lead, as if arranged by an Invisible Hand, to the outcome that is “best overall” (Warsh, p 365).

This is just not true in respect of Adam Smith. It may be true as a proposition by modern economists, most of whom never read Adam Smith and take their notions about his work second- and third-hand from their tutors. Smaller point: note how Warsh has slipped in the words ‘as if’ before invisible hand; these were never used by Smith at all (see WN IV.ii.9: p 456).

Warsh continues: ‘Economists have refined Smith’s intuition to a very fine grain. The efficiency of decentralised competitive markets under certain conditions is what Kenneth Arrow and Gerard Debrue demonstrated mathematically in the early 1950s, leading to an eventual Nobel Prize. It was then that economists began to talk of the Invisible Hand theorems as propositions so well established as to have been proved.’

Unpacking the errors in this paragraph is necessary. Arrow and Debrue did ‘demonstrate that decentralised competitive markets’ were ‘efficient under certain conditions’; they did receive a Bank of Sweden Prize in memory of Alfred Nobel; and no doubt many economists did begin to ‘talk of the Invisible Hand theorems’ as being ‘proved’.

But what they did not do was work with ‘Invisible Hand theorems’, Smith’s ‘intuitions’ or ‘prove’ them, because there were no ‘Invisible Hand theorems’ from Smith’s ‘insights’ to ‘prove’. He was not advancing ‘theorems’ about competitive markets when he used the lonely metaphor, the invisible hand, to state a consequence of human motivations on an entirely different subject to ‘competitive markets’. The myth that there were ‘theorems’ of an invisible hand to prove is purely a fiction of modern economics, culled I think from Chicago economists in the 20th century.

Smith never argued the ‘the proposition that, left to their own devices, individuals will pursue courses that lead, as if arranged by an Invisible Hand, to the outcome that is “best overall”. He was talking about relately poor tradesmen who were concerned about the safety of their scarce capital, preferring to use it close by where they were and not to send it out of sight because of the risk (their ‘security’). He was not discussing markets at all (he had already covered markets in Book 1; his single reference to the invisible hand comes in Book IV). He was discussing the consequence in this circumstance of trading locally, where you could see the user and be more assured of being paid, or trading abroad at much greater risk (this was the 18th century) dealing with people you did not know or see. Insecurity inhibited international trade and the 18th and 19th centuries were about devising more secure means of international trade and payments.

On this occasion, if fear and risk drove owners of capital-stock (artisans and tradesmen) to keep their activities close to them, then whatever their intentions and lack of concern for the public good, it would mean that capital accumulation would be aided locally by their individual decisions and not dissipated by spreading it a long way from them.

However, it cannot be generalised into a theorem that any individuals ‘left to their own devices, individuals will pursue courses that lead … to the outcome that is “best overall”. Smith was a Professor of Moral Philosophy, not a naïve reformer of the world. Individuals ‘left to their own devises’ can, and do, act in a manner which most decidedly does not ‘lead … to the outcome that is “best overall”. One has only to think of the Tragedy of the Commons to realise that such a proposition would be absurd, plus pollution, fraud and dangerous products.

Generalising from this, as David Warsh does, leads to a sense of comfort in the maths of ‘perfect competition’, to which I would draw attention to Smith’s comments on ‘The man of system … who imagines he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess board’ whereas ‘in the great chess board of human society, every single piece has a principle of motion of its own’ (Moral Sentiments,VI.ii.2.18: p 234).

Finally, the Pin factory is not the entirety of Smith on the division of labour. It was a single, ‘trifling’ example ‘often taken notice of’ by others ,to open a discussion on the productive powers of labour (WN I.i.3: pp 14-15). Generalising from this partial point, Warsh and others have seen this as a statement of ‘increasing returns’, which, of course, collides with ‘diminishing returns’, if we conceive them as complete opposites. I should imagine that maths minded economists would be wary here; it depends on where on the curve a factor is at, and nothing is implied about infinite increasing returns.

Smith’s second example is that of the sectors that contribute to the manufacture of a common labour’s woollen coat (WN I.i.11: pp 22-24). These inter-sector linkages are what makes an economy grow, and not just a single item (pins). Economies that consist of many markets (not just one!) are growing towards opulence (here Smith compares the poorest Scottish labourer favourably in opulence to that of an ‘Indian prince’). It is not just the technology or knowledge of the pin makers, but of all labourers and capitals intersecting in ever more complex sets of markets within which growth operates. By aggregating capital and labour factors to look for the causes of economic growth, a big something is missed. That it has taken 200 years to realise this, suggests our science has been a trifle myopic. I found this aspect most interesting in Warsh’s book. I recommend that you read it, contemplate its messages, and, like me when I had finished it, think about what you were doing while the growth controversy was joined by only a few, albeit brilliant, giants who tried to look at the ‘big picture’ but they could not see what was going on around their feet.Visit David Warsh's Blog at www.economicprinciples.comCommentI posted a comment on David Warsh's Blog but either I did it wrong or it was censored. If my rhetoric was a bit abrasive I apologise for any upset this may have caused.

Monday, May 22, 2006

Review of David Warsh's new book

ReviewDavid Warsh. 2006. Knowledge and the Wealth of Nations, W. W. Norton, New York

Part One

While it is better to be approximately right than precisely wrong, it is even better to be precisely right where we can. David Warsh spoils what looks to be a most interesting book by asserting errors as profound facts in the early chapters. I am only up to Chapter 6 and the errors are becoming irritants, saved from my dismissal of the rest of the book only by its engaging style, excellent composition and its story of the economics profession and people in, many of whom were familiar names from my student days and afterwards as the high tide of Keynesian whimpered to an end.

I will press on with it, but feel compelled to post a preliminary comment, with others, perhaps, to follow.

The preliminary summary in two pages (pp 35-6) of Wealth of Nations is masterly. No quarrels there. It may just be presentational, but Chapter Four grates on my sensibilities, ‘The Invisible Hand and the Pin Factory’!

Yes, David Marsh has bought the conventional account of Smithian economics right out of mainstream US academe. He writes ‘you’ll learn further that the book’s publication marked the discovery of the “Invisible Hand” – that is, of the great self-organizing interdependency of prices and quantities that we know today as the price system’ (p 37) and he calls the Invisible Hand and the Pin Factory the ‘bifocals of Adam Smith’.

No, I shall not stop on this occasion to demonstrate the fallacy of this interpretation of the generality of Smith’s lonely use of the metaphor of the invisible hand (from Shakespeare’s Macbeth, 1605, and Defoe’s Moll Flanders, 1722). I have covered this many times on this Blog and elsewhere, so if you are a new reader check through the archives.

I shall press on with a comment that David Marsh and his informants have a narrow view of Smith on the division of labour. The famous Pin Factory was one of two illustrations offered in Wealth of Nations. Warsh correctly notes that Smith took this from ‘an encyclopaedia’. For the record it was Diderot’s and also for the record, Warsh is wrong to assert (p 40) that Smith did not visit a pin manufactory; he did, though not the one Diderot described, and he says so in Wealth of Nations (WN I.i.3, p 15) with details of the work of ‘ten men only’, where ‘some of them consequently performed two or three distinct operations’ of the ‘eighteen distinct operations’ referred to by Diderot.

To insist that Smith didn’t do what he states he did is to assert that he was lying. It is a small point, but indicative of the errors lurking in an account based on secondary sources.

If Warsh, or his sources, had read further they would have come across Smith’s most significant assertion of the source of growth, and with it opulence, namely the ‘multiplication of productions of all the different arts, in consequence of the division of labour’, which he illustrates with the example of the day-labourer’s woollen coat (WN I.i.11: pp 22-4). It is not the intensity of the division of labour in a single product like a pin that is decisive but the extensity of the divisions of labour across entire productive sectors, and eventually across the entire globe, that brings about economic growth and opulence.

Maybe later on in Warsh’s book he and those of whom he reports recognise this important Smithian insight (also noted by others, including Bernard Mandeville, Fable of the Bees, 1724), but I must wait and see.

These errors or omissions pale into insignificance in Warsh’s treatment of the epithet of the ‘dismal science’ applied to economics. Chapter 5 is entitled, ‘How the Dismal Science Got its Name’ but manages to avoid stating the basis for Warsh’s assertion. What it does ionstead is repeat the myths popularised in textbooks and newspaper Op Eds circulating in and from US academe in the 20th century.

Warsh links ‘dismal’ as a contrast with the alleged optimism of Smith (1723-90), Condorcet (1743-1794) and Godwin ( ), and places among the ‘dismal’ proponents of economics the names of Malthus and Ricardo, the former a prisoner of the iron law of exponential and arithmetic series and the latter an exponent of the inevitability diminishing returns to factors. A plausible enough theory bought in its entirely by Warsh, but, alas, so wrong as to be embarrassing. Warsh, an established journalist of 23 years vintage on the Boston Globe, apparently forgot the golden rule of journalism: check your facts and check your checks.

The first uses of the term the ‘dismal science’ came not from the pessimism of Malthus and Ricardo, nor from the restless years of the Napoleonic wars. The ‘joy’ of being ‘alive’ and the ‘heaven’ of being ‘young’ were a prelude to the mood swings of an artist’s disillusion, and not the considered opinions of critics of economics. The accolade, for such as it is, for calling economics the ‘dismal science’ belongs to Thomas Carlyle years later - in the late 1840s to be more precise – and while a charge against economics the substance of the charge had nothing to do with Smith’s, Condorcet’s, or Godwin’s optimism versus Matlhus and Ricardo’s pessimism.

It was caused by Carlyle’s racism and his horror at the idea, suggested by James Stuart Mill’s, that forcing fellow human beings, such as Negro people, into slavery was inhuman and morally wrong. Carlyle reacted to the notion that Negro people were human with horror and disgust, and because economists appeared to endorse the notion that blacks and whites were full members of a common race, the human race, he accused them of expounding an utterly ‘dismal’ philosophy contrary to all civilised values.

The evidence for Carlyle, long after Smith, Condorcet, Godwin, Malthus and Ricardo had died, being the source, the inspiration and the original exponent of economics being the ‘dismal science’ has been discussed before on this Blog (see archives), and the academic evidence for this being case can be found at:

Should David Warsh have known this? This would only be an unfair assertion if he had mentioned it in passing, but his Chapter 5 carries the heading, ‘How the Dismal science Got its Name’, and an experienced journalist is duty bound to check his facts (he could Google ‘dismal science’ and see for himself).

I did note that Warsh assumes or implies Smith had a theory of growth, but so far Warsh speaks as if Smith did not have a ‘stagnation’ scenario, which in fact he did have. In Adam Smith’s Lost Legacy (2205) is discuss Smith’s growth and stagnation hypothesis in detail.

I shall continue reading ‘Knowledge and the Wealth of Nations’ and report back in Pat Two.

APOLOGIES!

I have been cut off from the Internet since Saturday's post by a strange 'logic' in France Telecom.

Grateful for an opportunity to acquire ASDL broadband in rural France, I agreed to pruchase the connections from France Telecom. I was not told that the connection would take place on 1st June, but this is no problem as I can wait a fortnight.

However, France Telecom meanwhile cut off my phone line connection to Wanadoo without telling me, presumably without a concern that I would be without any internt connection until the undisclosed 1st June broadband connection.

It took all Monday morning to discover this and to arrange re-connection. I am used to French adninistrative 'logic' having lived here each summer over the past 17 years, but nothing beats the thinking behind whoever cut me off!

Now its restorted (hopefully). Hence, apologies for the interruption to my posting.

Saturday, May 20, 2006

Galbraith Was Not Like Adam Smith

“Of course my introduction to economics spoiled me because I thought that all economists possessed Professor Galbraith’s gift for language. Such was not the case. Mr. Galbraith was a throwback to classical economists such as Adam Smith and David Ricardo, who combined a facility with language and keen observations of human nature in writing their tomes. Smith, in particular, littered The Wealth of Nations with wry comedic observations (I’m not saying the book is filled with knee-slappers about priests, rabbis, and horses who walk into bars, but there are many passages that should bring a smile).”

CommentI would agree with Mr Dell that Adam Smith “combined a facility with language and keen observations of human nature in writing” his ‘Moral Sentiments’ (1759) and ‘Wealth of Nations’ (1776), but David Ricardo? And Smith had a rhetorical style that was sharp and amusing; I do not remember many such ‘wry comedic observations’ in Ricardo, who is better known for his abstract language and sometimes tortuous syntax.

“The Age of Uncertainty describes itself as “A history of economic ideas and their consequences.” As he describes in the related book’s introduction, the point was to talk about men first, then the institutions that implemented their ideas. One point was, no doubt, to show how far the free market disciples had strayed from the source of their devotion; modern Chambers of Commerce will praise self-interest without understanding what Adam Smith’s true views on self-interest were.”

CommentI think the main problem with Galbraith is that he was wrong on many points; he exaggerated the influence of corporations and seemed to see society as one gigantic conspiracy theory (a theme suggesting that US society is paranoid – the ‘powers that be are not out to get you; they already have managed to do so’).

Smith’s rhetoric and historical method survives and will last. Galbraith, much like Veblen, latched onto a few powerful themes that are already dated. Chomsky is another intellectual in similar vein.

Friday, May 19, 2006

Growl If You Dare

“Stocks continued their weeklong plunge yesterday, selling off again at the end of the day on more inflationary fears. The way to understand this washout -- knocking 4.4% off the Dow -- is that Adam Smith is giving the U.S. financial establishment a warning.We're using our favorite moral philosopher here as a proxy for the ruthless discipline of financial markets. They can be brutal in punishing economic mismanagement, and for several days Mr. Smith has been growling that the Federal Reserve and its easy-money cheerleaders on Wall Street and in Washington need to sober up.”

Comment

Well, that’s journalism for you. If you can annoint an article with a reference to Adam Smith (‘spinning in his grave’ is a common one) you gain credibility of some kind. But it is a nonsense, of course. Modern financial markets are beyond anything that Smith imagined or could have imagined in the 18th century.

He had much to say about profligacy and the fate of those who spent revenue rather than invested it in capital stock to support productive labour to produce real output for local or distant sale. But I cannot imagine him ‘growling’ as a ‘warning’ to individuals about what they choose to do with their own money. He was not an evangilist nor an interferer in people’s behaviour!

Smith observed – the true role of a philosopher – he was not an activist, a capaigner for everybody to do what he felt was the ‘right’ thing to do. Actions had consequences; he pointed some of them out in his ‘Inquiry’, but whether others took note was entirely up to them.

Please read Adam Smith before you quote him in pursuit of your agendas. Otherwise, I’ll growl at you.

Thursday, May 18, 2006

On the Virtues of Immigration

A short post today:

News Item: Additional embarrassment for the government and the Home Office.

Illegal immigration and criminal convictions have been in the news lately. Yesterday, the Home Office official in charge of sending back immigrants who are not in the UK legally, including persons convicted of serious crimes and recommended by the Courts for deportation, admitted to a Select Committee of MPs that his department 'hadn't the faintest idea' how many illegal immigrants are in the country. This honest admission caused 'shock and horror' among the MPs and the tabloids had a great time castigating the government and the officials for not knowing the number.

I find it difficult to understand how any department could answer such a question; if the number of illegals is known it becomes an odd definition of 'illegal' because I would have thought that by definition such a number would be unknown.

If asked how many criminals there are in Britain we could count the number of persons convicted of crimes and announce that figure, though it would vary by when the cut-off date for their convictions was chosen and how many convicted persons had since died. But the number of persons who have committed criminal offences at any one time poses different problems. Many are not caught, many may commit more than one offence and many crimes are not reported.

However, tonight the tv is blasting all over the screen the embarrassing news that five 'illegals' have been arrested who were caught working as cleaners in the Home Office building.

But before we all snigger - or at least just afterwards - I had to ask myself which would I prefer: People who were legally in the UK but behaving criminally, or legals and illegals who were behaving criminally in prostitution slavery, drug trading, enforcement, theft and gangland murders, or illegals working at peaceful low paid jobs cleaning government buildings?

I am increasingly dubious about the rising clamour against 'illegal' immigration, as much as I am broadly in favour of general immigration. I say nothing about the USA situation. But it seems to me that immigration on the whole is a positive social change. Combined with a firm policy of deportation of those who commit crimes (risks of returning them to certain countries should not prevent deportation), are security risks and who are undesireable for their criminal records; a society should welcome people coming here to work and add to the GNP.

Scotland had a credible record on such matters in the 18th century. Slavery was declared illegal in Scotland and a slave who had been brought into the country was set free in 1778. Smith took a stance against slavery. In Moral Sentiments he wrote:

Fortune never exerted more cruelly her empire over mankind, than when she subjected those nations of heroes to the refuse of the jails of Europe, to wretches who possess the virtues neither of the countries which they came from. nor of those which they go to, and whose levity, brutality, and baseness, so justly expose them to the contempt of the vanquished (TMS v.2.9).

Wednesday, May 17, 2006

A Wee Parable for Today's Easy Solutions

“Aren’t economists in a rut? We need a more credible human model than what economic theory has been able to provide.” By Arun Mairi

“While some people were delighted with this apparent change of heart amongst profit-obsessed businessmen, others, like The Economist, were aghast. In an issue focussing on corporate social responsibility, the journal argued that good economics (citing Adam Smith for this, as it often does) requires corporate leaders’ social responsibility be limited to the pursuit of profits for shareholders and nothing else.”“Economists tend to over-simplify their assumptions to enable mathematical modelling. For example, The Economist says, “Measuring profits is fairly straightforward; measuring environmental protection and social justice is not. The difficulty is partly that there is no single yardstick...How is any given success for environmental action to be weighed against any given advance in social justice, or, against any given change in profits? Measuring profits—the good old single bottom line—offers a pretty clear test of business success.”This is sheer intellectual laziness. If Newton had decided to ignore the concept of gravity merely because he did not have the means to measure it, physics could not have developed its power to change man’s world.”

Published in Financial Express, Mumbai, India today.

CommentMakes it sound easy, doesn’t it? Modern economics has gone down a blind alley into abstract mathematics, turning it back on political economy as envisaged by Adam Smith, yet it often justifies this direction by references to Adam Smith and isolated quotations from ‘Wealth of Nations’, shorn of their context.

‘Trading for the public good?’ Waste of time. If the government directed them to do so with a view to growing the domestic economy and not dissipating its energies in distant investments, it would probably fail. Hence, don’t bother. Leave ‘em alone and they’ll bring the bacon home.

Why? Well most of them don’t like to invest their scarce capital stock where they cannot watch over it. It’s called risk and in the early primitive stage of capital accumulation the risks are greatest, the consequences dire if it goes wrong – absolute poverty for those involved. Hence, they are more likely to take smaller risks with their capital-stock where they can watch over it. This itself concentrates capital accumulation, job creation and profit earning locally.

Makes sense doesn’t it? What? Is it different today since Smith wrote the above ideas in 1776? Well of course it is. Small tradesmen and artisans with £5 or £100 of capital have been replaced with multi-million, even multi-billion pound corporations, the rule of law and contracts is so widespread and sophisticated that whole firms of lawyers, accountants, financial and technology specialists abound.

Yes, we need new approaches and I have only mentioned Adam Smith’s ideas on this particular issue because the Economist did so. Whether the Economist’s use of the ideas of Smith suitable for the 18th century are valid in the 21st, that’s another question. But whatever you do, don’t ask a mathematician – they know little about people and less about how real economies work.

Tuesday, May 16, 2006

New Research on the Invisible Hand

On www.mises.org Mark Thornton publishes a thoughtful paper on the uses and abuses of the invisible hand in modern economics, including several top flight professional economics journals recently. It is an extremely interesting paper and should be read widely.Below are some preliminary comments of mine. They are not definitive just yet as I need more time to study Mark's analysis and to think about his theme, including to check over Cantillon's Essai which I have with me in France.Comment (Posted on www.mises.org)"The Invisible Hand was used as a metaphor by Adam Smith in his ‘History of Astronomy’ (1743-48) in mockery of pagan religious beliefs that invisible gods intervened in human affairs (his mockery may also have been a coded sneer at established religion). It was used as a metaphor in ‘Moral Sentiments’ (1759) similarly to mock the pretensions of the rich landowners because in spite of their ‘vileness’ they ended up doing what the poor would have done for themselves, namely fed, clothed and sheltered their families. It was also used as a metaphor in ‘Wealth of Nations’ (1776) to mock the unintentional local wealth creation of people seeking to better themselves amidst private concerns about the risks (the ‘security’) of their capital moving outside their neighbourhood. ‘Distant sale’ represents a slow, gradual and cautious development of trade practice.

In none of these cases did Smith create a theory of markets. Nor did he need to ascribe anything ‘mysterious’ to how markets worked. The source of ‘wonder’ precedes understanding; ‘admiration’ comes from understanding in Smith’s philosophical method. Once the ‘connecting chain’ is identified and understood the philosopher is no longer in ‘awe’.

The metaphor itself long preceded Smith’s first use of it in the 1740s. It can be found, for example, in Shakespeare (Macbeth, 3:2; 1605): ‘thy bloody and invisible hand’, and in Defoe (The Fortunes and Misfortunes of Moll Flanders; 1722): ‘A sudden Blow from an almost invisible hand, blasted all my Happiness’.

I read and much enjoyed your paper and will take some time to study it and its sources. My initial comment is that modern usage of Smith’s metaphor is to take it far too literally, almost to subject it to metamorphosis, well beyond what Smith intended. Smith lectured and wrote in a rhetorical style, common in the 18th century.

While justly exposing the fallacies of the ten interpretations of the invisible hand, I find your painstaking analysis of them terminating in a another fallacy, albeit brilliantly argued from his links to Cantillon’s Essai. You seem to say Smith started using the metaphor in 1749, and again in 1759, both usages suspected as being just ‘metaphors’, but in 1776, after reading Cantillon’s manuscript in French (there have been suggestions that Smith translated it – I am sorry but my references are at my Edinburgh home and not with me here in France), found a real theory of markets to which the metaphor could be applied and that he used it in this sense in Wealth of Nations, though when he did he was not writing about markets!

If you had confined yourself to establishing a source for Smith’s use of Natural and Market prices and the rewards to land, labour and capital stock, you would have done enough. At his moment I think you went too far in trying to invest his casual use of a mere metaphor with deeper meaning.

Despite this preliminary conclusion, congratulations on a well researched paper."

Monday, May 15, 2006

Hernando de Soto Interviewed

“The Poor are the Solution, not the Problem, Hernando de Soto interviewed:

“R&L: And finding this missing thing is the mystery of capital. De Soto: That’s right. What the book tries to convey is that the traditional reforms associated with establishing a capitalist system—monetary stability, fiscal equilibrium, privatization—are definitely not enough. What makes the capitalist system function well in the United States, Western Europe, Japan, and the four Asian tigers is a very good property and transaction legal system. As both Adam Smith and Karl Marx explained, what gives the market economy system its power is essentially the wide-spread division of labor, what we today call specialization. Specialization has been possible in the Western world throughout these last two centuries because of the ability of specialists to create and exchange capital among themselves, and that ability exists because the West has good property law, which allowed for good market transactions. For at least 70 to 80 percent of the world’s population, for former communist nations and developing countries, a legal system allowing for the definition of property rights and their transaction in an orderly market is not in place.

R&L: What is this property and transaction legal system?

De Soto: It is what you in the United States have right under your noses. Every asset, from a bicycle all the way up to a nuclear plant, is essentially titled within the law. Every act inside your legal system is done according to written rules and can be followed within up-to-date records, where transactions, debts, and investments can be tracked. Every company is owned by people represented in its shares. Every home and automobile has a recorded property title or deed, which allows the identification of who owns what and where. All developing and former communist nations, with the exception of maybe 10 to 20 percent of their population, do not have such records or rules.”

Edward Lucas Applies Pure Smithian Good Sense

“CHRISTIAN AID WEEK is rightly a time for warmheartedness. But that is no excuse for softheadedness. It is sloppy thinking, for example, to believe poverty in one place is caused by wealth in another. To share the wealth of the rich world evenly among the poor would temporarily dent poverty, not end it. Redistribution invariably destroys wealth in one place; it rarely creates it in another. The redistributed money would mostly go on short-term consumption or be stolen by corrupt officials. The root cause of poverty, above all injustice, would remain.Hernando de Soto, the Peruvian economist, has shown convincingly how abuse of property rights by the powerful and corrupt prevents subsistence farmers and shantytown dwellers from getting on to the first rung of the wealth-creating ladder. No property rights mean no collateral for loans, no mobility and no investment.

Nelson Mandela said last year in a speech of uncharacteristic foolishness, that “like slavery and apartheid, poverty is not natural. It is man-made.” Actually, poverty is all too natural: not so long ago a nice flint axe and a dry cave was the summit of human material ambition.But, tragically, anti-poverty campaigners in the West have allowed themselves to be conned by the protectionist arguments of rich people in poor countries. The protection of corrupt, incompetent and uncompetitive producers and providers of goods and services in poor countries levies yet another tax on the weakest. Yet the poor above all need the best choice of goods and services at the lowest possible prices.”

Read the article in full at The Times at http://www.timesonline.co.uk/article/0,,6-2180706,00.htmlComment:Edward Lucas speaks pure Smithian market economics, linked to honest government, the rule of law and the protection of property. We should never forget that Smith took a holistic view of society and recognised social malformations (laws that irked the poor, discriminated against women and protected the property only of the rich) stood in the way of the spread of opulence to all classes.

Hernando de Soto, the Peruvian economist, appears to be an economist worth reading too. This is an example of the beauty of the blogosphere: it spreads the word.

Sunday, May 14, 2006

Eamonn Butler, James Buchan and Adam Smith

Eamonn Butler of the Adam Smith Institute (13 May) writes:

“Chancellor leads second kidnap attempt on Adam Smith”

“An unseemly battle is being fought over the soul of Adam Smith. Britain's Chancellor of the Exchequer, Gordon Brown, wants to paint his fellow Kirkcaldy resident as a Scottish socialist, rather than the champion of non-intervention, and has prompted economists and historians to make this case. His enthusiasm has infected James Buchan's new book on Smith; and in a month or two the title of Iain McLean's new volume ('Adam Smith: Radical and Egalitarian') will say it all.There are three arguments. The first is that Smith was no defender of merchants and manufacturers, and in fact distrusted them. Quite right. But then he distrusted governments and regulation too. He thought that people should be able to trade freely, without ministers, officials, or indeed would-be monopolists trying to stop them. It a view that I share: I hate all coercion, either from monopolists or governments. But it hardly makes me a socialist.Second, it is said that Adam Smith did not really say much about the 'invisible hand' and even then it is not an argument for laissez-faire. Quite true. But what Smith actually advocated, as I do, was not laissez-faire but a free, competitive, market economy. Markets need general rules to prevent coercion and preserve competition: while socialist intervention is coercive and destroys competition.The third criticism is that Smith wrote at length on the virtue of human sympathy, which cannot be reconciled with the self-interested nature of capitalism. This reveals the fault in the Brownian thesis: it has not got Smith entirely wrong, but it has got capitalism entirely wrong. If businesspeople really were as amoral as that, our leading industries would be people trafficking and gun running. But most people who run businesses and invest in businesses are ordinary, moral people who might well want to turn a buck – but an honest buck.Smith's famous remark that when businesspeople meet up they invariably start conspiring against the rest of us, is followed by an explanation of what prompts such cartels. In a word, it is regulation. Smith was no critic of fair commerce: but he was a staunch critic of the power of our rulers to pervert it.”

I have no standing with the ASI – a campaigning organisation for competitive markets in place of government sponsored attempts to intervene from the top – though we have parallel concerns in this area and I am broadly sympathetic with much of what ASI stands for. That said, I recognise the significance of ASI’s intervention in the burgeoning dispute between those who misuse Adam Smith for ends he never advanced on both sides of the political spectrum and those whose concerns are broadly to present the facts about Smith, his life and work, in the best traditions of scholarship.

One problem with politically motivated interpretations of Adam Smith’s legacy is that they selectively extract from his life’s writings – more that one and a quarter million words – and apply them to circumstances over two hundred years after they were written and which are so far from the world he knew of as to be almost meaningless.

Gordon Brown is not the first by a long way to have engaged in such antics. People of a more conservative disposition have been doing this to Smith’s legacy since early in the 19th century and the habit is almost rampant in the United States in both political commentary and, sadly, in academe. Smith is presented, laughably, as the ‘High Priest of Capitalism’, a pioneer of ‘laissez faire’, a theorist of the ‘invisible hand’, and advocate of the ‘night watchman state’ and ‘free trade’. Worse, it is asserted, by a ‘Nobel prize winner’, that ‘Wealth of Nations’ is founded on the granite of ‘self-interest’. None of these assertions (Gordon Brown’s included) about Adam Smith are true.

Jacob Viner, a long time ago, expressed it judiciously in his admirable 1928 essay: ‘Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations to support his special purposes.’

In this Eamonn is absolutely right: ‘what Smith actually advocated, as I do, was not laissez-faire but a free, competitive, market economy.’ Spot on!

Apologists for government excesses, spinner of lies about the malfeasance of corporate executives caught in nefarious scheme to cheat consumers and investors, and all those who rely on jaded quotations from Wealth of Nations and Theory of Moral Sentiments for their tired (lazy is not too strong a word) attempts to hijack Adam Smith behind their misuse of his legacy for unworthy ends deserve their uncomfortable shelters exposure to the truth.

James Buchan’s new book is an admirable and refreshing account of Adam Smith, his ideas and life. I have not yet seen Ian Mclean’s new book (it’s on order) and pre-publicity suggests, unpromisingly, it will attempt to establish the hypothesis that Smith would support New Labour. I will judge it on its merits. Meanwhile, this blog: (www.lostlegacy.co.uk) shows with what I deal almost daily from a Smithian point of view in respect of the issues Eamonn raises.

“The late Jane Jacobs was a voice of sanity against Big Brother's urban planning. She and Adam Smith were reading from the same page.Jane Jacobs died recently at the age of 89. She ‘was most noted for her 1961 book, "The Death and Life of Great American Cities," which refuted the pretensions of liberal-progressive city planners.

In the works of both Jane Jacobs and Adam Smith, individualistic spontaneity, exercised incrementally, over many generations, is understood to be the wellspring of all of human society's effective and enduring institutions.”

CommentThis last paragraph is an excellent summary of Smith’s approach. Thomas Brewton adds:

“Adam Smith's 1776 "Wealth of Nations" was the first comprehensive inquiry into the realities of economic activity. He observed in the records of thousands of years of history that social institutions bettering the human condition were spontaneous, trial-and-error affairs involving many thousands of individuals in disparate locations, most of whom were unaware of each other and of each other's intentions.

CommentSmith took the long view of events. So should we all. That is why the recent discussion about the Fall of Rome on the Mises Blog is important. One commentator asked why the years after the fall of Rome are known as the Dark Ages – what else would you call a thousand years of social stagnation and barbarism?

But note the point that Thomas Brewton makes about the “spontaneous, trial-and-error affairs involving many thousands of individuals in disparate locations, most of whom were unaware of each other and of each other's intentions.” That exhibits as complete an understanding of Adam Smith’s philosophy as can be crammed into one sentence.

Tim Harford on Adam Smith

Tim Harford who, like Tim Worstall, ‘knows economics and writes well’ – in fact, probably better than just ‘well’ - publishes a review in Friday’s Financial Times of James Buchan’s new book, ‘Adam Smith and the pursuit of perfect liberty’ (Profile Books, May 2006). And an excellent review it is too.The following paragraphs caught my attention:“Buchan’s evident admiration for Smith doesn’t stop him attempting to deflate the idolatry of the philosopher by modern pundits. Scornfully dismissing a paean to Adam Smith by Alan Greenspan, then chairman of the Federal Reserve, Buchan sneers, “One could with better justice claim that Moll Flanders, a resourceful whore in the fiction of Daniel Defoe who also uses the phrase ‘invisible hand’, is another towering contributor to the stability of international markets.”In this, Buchan goes too far. It is true that the phrase “invisible hand” was never used by Smith to refer to the smooth and socially beneficial operation of market forces. And it is also true that the commercial activities he so carefully observed, in marked contrast to the fact-free theorising of some of his followers, were part of the horse-and-cart economy of the 18th century, not the global finances of the 21st.But Smith is unmistakeably a chronicler, theorist and great advocate of the virtues of the market, as Buchan shows. Twenty five years before his most famous work, The Wealth of Nations, was published, Smith argued in a public lecture in Glasgow that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice”. Greenspan may have interpreted Smith’s ideas too loosely but he did not imagine some fictional hero.”

CommentTim Harford goes ‘too far’ himself with his polite chastisement of James Buchan for his correct identification of the transformation by Greenspan (who has no excuse being himself an accomplished economist) of Smith’s lone metaphor into a theory of markets. Smith never used the metaphor of the invisible hand as a theory of markets; he did not even use it in a discussion about markets.

This can be seen by anybody who reads the quotation mentioning the invisible hand metaphor in its place in the section of Wealth of Nations (Page 456). Surely, someone preparing an important speech to a distinguished audience, among them many economists of note, would check his references even assuming he was unfamiliar with the quotation – surely a wistful hope in the case of an eminent economist like Alan Greenspan.

That Tim Harford excuses the crass error of Greenspan is surprising; he should be congratulatory of James Buchan for making such a telling point about Moll Flanders, Defoe’s 1722 fictional character (Buchan, p 2, n 2). The invisible hand goes back further to Shakespeare’s Macbeth (3:2) in 1605. Yet it is repeated almost daily as Smith’s theory of markets when Smith was perfectly clear about how markets work without ‘miracles’ or great ‘mysteries’.

It wasn’t that Greenspan imagined ‘some fictional hero’, but that Greenspan imagined some fictional Adam Smith.

Tim Harford’s reference to Smith’s 1755 speech ‘twenty-five years’ earlier that Wealth of Nations (twenty-six actually) and its well-known summary that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice’, on which I have commented in the Appendix, The 1755 Paper’, in ‘Adam Smith’s Lost legacy’ (Palgrave 2005), is apposite too. It does not mention markets. Indeed, Smith was of the opinion that if liberty was essential to each country that became opulent there would be few countries developing into opulence anywhere.

I think Smith’s point was that in a state of liberty, countries would develop towards opulence without the regrettable vestiges of oppression so much associated with the ‘rulers of mankind’. The oppressors, war mongers and tax collectors, so common in history were unnecessary for mankind’s well-being and happiness. To which I hope we can all agree.

The Romans and the Greeks did much more than develop a professional army, but I would need to read the original article to be definitive about this. But taking the fall of the Roman Empire in the round, the fact that Europe entered a 1,000 year period which was back at the stage of economic development before the classical Greek and Roman civilisations and largely bereft of the Age of Commerce that they ushered in, suggests that Adam Smith's assessment was correct.

The destruction of the western European economy under the war lords, the great land grab and the almost permanent centuries of warfare between and among local war lords, were not conducive to economic progress. I am not sure we owe very much to the barbarians, whose demise was the appearance of settled fuedalism, almost non-existant trade and thereby local self-sufficiency at a low standard of living ('princes' included), and a curbing of science and technological progress.

Still, I am always willing to study new scenarios. Where can I get a copy of their arguments?

Thursday, May 11, 2006

Apologies - again

The frustration continues.... to the exigences of a 19-hour drive to our place in rural France, I picked up a flu/virus en route from Poland, then found my computer did not connect to the Internet, and having sorted that out from 80-mile round trip, I find that the telephone line runs at 36 bips!

I will need some days to sort this through France Telecom; messages will be rare and short for a few days.

Modern technology is wonderful, when it works. I am working to solve it.

Monday, May 08, 2006

A short intermission

More light blogging for a day or two while I drive to France. I should be active again, once I reconnect, by Wednesday evening or Thursday.

This migration is now an annual event.

There are lots of snippets on Adam Smith studies in my in-tray. The visit to Warsaw, Poland was most interesting and stimulating. But with most of my library packed and the rest in France from last year's migration it is better that I await before developing some of the themes.

Smith's Missing Jurisprudence Work

The comment by James Farrell on Nicholas Gruen’s review of James Buchan’s recent book on Adam Smith questions the failure of Smith to complete what he announced he had set out to do in his ‘Theory of Moral Sentiments’ 1759, namely to write an account of jurisprudence. Now Smith claimed consistently that he was still working on this project for 31 years, right up to his final edition of ‘Wealth of Nations’, sent to his printer only a few months before he died in 1790.

James Farrell, in his comment on Nicholas Gruen’s review presents the conventional account for Smith’s behaviour:

“My only comment is to wonder whether there is really any great mystery about why Smith abandoned the 'third' book (which would have been the second book had fate in the form of Townsend not intervened). I didn't think there was more to it than what John Rae wrote:‘In the preface to the 1790 edition [of TMS, Smith] refers to the promise he had made in that of 1759 of treating in a future work of the general principles of law and government, and of the different revolutions they had undergone in the different ages and periods of society, not only in what concerns justice, but in what concerns policy, revenue, and arms, and whatever else is the object of law; and he says that in the Wealth of Nations he had executed this promise so far as policy, revenue, and arms were concerned, but that the remaining part of the task, the theory of jurisprudence, he had been prevented from executing by the same occupations which had till then prevented him from revising the Theory. He adds: "Though my very advanced age leaves me, I acknowledge, very little expectation of ever being able to execute this great work to my own satisfaction, yet, as I have not altogether abandoned the design, and as I wish still to continue under the obligation of doing what I can, I have allowed the paragraph to remain as it was published more than thirty years ago, when I entertained no doubt of being able to execute everything which it announced.’ ”

Two aspects of Smith’s own explanations for not concluding his promised work on jurisprudence, and of some other works which he claimed at various times to have on the ‘anvil’, raise credible doubts as to the truth merely being completely explained by what he allowed into the public domain.

Over 31 years between his first public announcement and his last is at the very least most strange. He was not suffering from ‘very advanced age’ for all 31 years; he did not have to make public pronouncements of his intentions to remind readers of what was missing; he wrote and delivered the bulk of his intellectual ‘system’ in his Glasgow lectures in 1751-63 (see his ‘Lectures on Jurisprudence, 1762-3; for which he received his doctorate, LL.D) and he worked diligently from 1778-1790, excepting some minor periods of leave while engaged in publishing editions of his two books and advising the UK government on trade policy and, significantly the American war, as a Commissioner of Scottish Customs in Edinburgh, showing anything but indolence or the effects of ‘advanced age’ right up to a few months before he died.

In this respect note that Smith wrote or signed 90 per cent of the over 1,100 pieces of correspondence and reports for the Scottish Commissioners, which allowing for his few absences, means he dealt personally with nearly 100 per cent of their output from 1778-1790.

Hence, there is controversy about his sudden decision not to publish the long awaited third book on Jurisprudence to complete the promised trilogy. My suggested explanation in Adam Smith’s Lost Legacy (2005) is that Smith was too embarrassed politically and personally to publish Jurisprudence. He was noted for his prudence in all matters (for instance, only critiquing by name dead, not those of living, authors).

Reading his lecture notes on Jurisprudence, made by students in 1762-3, on the social-political evolution of constitutional liberty in Britain (mainly England), knowing of his ‘Hanoverian’ affiliations through his father’s role in the 1704-5 shenanigans to unify the parliaments of Scotland and England and of his own predilections that led him to be within the Duke of Argyll’s sphere of interest in those crucial years from which he obtained his education at Glasgow and Oxford, and his chairs at Glasgow University, and knowing from his works of he ‘republican’ sympathies (i.e., ‘democratic’, pro-the lower orders of society and in favour of ‘liberty’), it is not a stretch of conjecture to suggest that the American rebellion posed serious personal problems for Smith.

Wealth of Nations contains material of the ‘recent disturbances’ in the American colonies and he takes a conciliatory line towards the demands of the colonists within a frank discussion of the proper role of colonies in a ‘great Empire’. That is about as far as he could go without causing political repercussions for himself and for others who espoused similar sympathies. In the context of Smith avowal of the benefits of stability in social harmony, amidst the ever present dangers of ‘factions’ and ‘discord’, he faced a dilemma: to support the cause of constitutional liberty in America was disloyal to the Hanoverian King and government; to oppose the same was disloyal to those principles he enunciated to his classes in 1751-63. He chose to remain silent.

As it was just after his death in 1790, from the time Dugald Stewart read his eulogy in 1793, the political atmosphere had swung towards repression under the influence of the French Terror, and many of Smith’s friends were investigated, along with Smith’s books, for signs of sedition and for stirring up discord among the common peoples. Men of lesser social importance were subjected to judicial punishments, including transportation to New South Wales and in a few instances to hanging. If ‘Jurisprudence’ had been published as it was likely to have been written on the basis of his jurisprudence teachings, the ‘close’ inquiries into Smith’s friends, and his own reputation, would have been a lot ‘warmer’ and discomforting than it was when the authorities only had Wealth of Nations and informers’ reports to go on.

When Smith ordered his unfinished manuscripts to be burned he did not know about the students’ notes, which by then were stored among family papers and forgotten. He could assume that the oral tradition was not a threat to him or others, the students having dispersed. Without hard evidence the authorities were powerless to think the worse. A hundred years later in 1896, the first set of students notes surfaced in Scotland (John Rae’s biography was published in 1895) and the second set was discovered in 1958. This changed the game considerably from the effects of natural aging to one of contrived prudence.

Tuesday, May 02, 2006

Temporary Interruption to Lost Legacy Daily Blog

From Wednesday 3 May I am attending a seminar in Warsaw, Poland until Sunday 7 May, when I return to Edinburgh.

I do not know if I will be connected to the net (my laptop with wireless connection is in for repair; I hope it will be fixed by 8 May).

On 9 May I am travelling to France for the next few months. I am connected to Lost Legacy on the net from 10 May on my system at our house there.

Apologies for this interruption to Lost Legacy, which comes at an inconvenient time as in the last week of April Lost Legacy achieved the best number of weekly hits and the largest number of page views since we started in March 2005 (10,000).

As I will be hoping to complete my current project of a volume on Adam Smith for Palgrave's 'Great Thinkers in Economics' series during the next few months in France, I shall have quite a lot to say about Smith's social evolutionary 'system', much of which I hope to share with readers.

I shall also update Smith's bibliography which I first published in 2005 on Lost Legacy. Since then during my current researches I have collected many more titles for the listing.

Apologies for my temporary absence. I hsall make some contributions on my return from Poland on the 7th and 8th May.

Good Advice in Nova Scotia

TO FOLLOW ALL 2083 POSTS
(AND COUNTNG) FROM HERE TO 2012 AND BEYOND, PLEASE USE THE NEW ADDRESS.

THANK YOU

Gavin Kennedy

The ChronicleHerald.ca Halifax Noa Scotia 2 May:

‘Allowing free market to work in Nova Scotia makes a lot of sense’ by Peter Moreira, a St. Margaret’s Bay writer who authored Hemingway on the China Front, which was just published by Potomac Books.”Scotland gave the world not only golf, curling and kilts but also the science of economics. The world’s first economist was Adam Smith, an 18th-century Scottish professor.

I’ve never read Smith’s 1776 treatise, The Wealth of Nations, because, well, it’s pretty long and has lots of big words. But I do know it says nations grow wealthy by encouraging competition and free trade. That way, their goods and services are sold to as large a market as possible, and their consumers pay the lowest price for products.‘‘The price of monopoly is upon every occasion the highest which can be got," wrote the sage of the marketplace 230 years ago. "The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together."

Once again, we’re facing the bleak prospect of gasoline regulation for no good economic reason. In fact, according to Adam Smith, the best way to lower the price of gas or anything else is to leave it to the marketplace.

CommentHonest enough to admit he hasn't read Wealth of Nations - too long, big words? - but right about gas regulation, Peter Moreira is different from most people who have read Smith's book. Many of them get it all wrong.

Anyway, nice to see the good folks of Nove Scotia are reading good advice (and without any reference to invisible hands and laissez faire!

Monday, May 01, 2006

For a Bit of Balance

“He will, perhaps, be best remembered for his infamous praise of the Soviet economy in the 1980s. Writing in The New Yorker, he said: "That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene... One sees it in the appearance of well-being of the people on the streets...Partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower." Separately, he said that that standing on the Berlin Wall: "Looking in either direction it really makes no great difference". But by this point Reagan and Thatcher were both in power who recognised the failure of the state command-and-control economic ideas followed in post-war period. The Soviet economy collapsed, and Galbraith was out of fashion.”CommentIt’s always amazing what one cannot see for looking in making sweeping judgements about economies or societies or their politics if you have a certainty about your theory of how the world works. It’s much the same with a lot of anti-Americanism today - only the bits consistent with your world view are seen; the abundant contrary evidence dims in comparison. To lighten this up a bit, stern football fans of a particular team see every slight knock by another team as warranting the referee’s dismissal.

Galbraith in this judgement was woefully wrong, much like Karl Marx, for all his studying of 19th century capitalism and his conclusions that it would collapse under the strain of falling living standards for the already starving workers. But in Galbraith’s case, to err is human, to forgive divine. He did so much more that to make the odd serious mistake hardly condemns his life’s work out of hand. And it is still worth reading to see how economics might be written.

Galbraith in What He had Learned

“I've long been an admirer of Adam Smith, who's greatly praised by conservatives--who unfortunately have never read him. They would be shocked to find some of the things Smith advocates.”

CommentI hope we can all agree with that, though as Jacob Viner put it: ‘Traces of every conceivable sort of doctrine are to be found in that most catholic of book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations in support of his special purposes’ (Laissez Faire, in Adam Smith, 1776-1926: Lectures to commemorate the sesquicentennial of the publication of the Wealth of Nations, 1928. University of Chicago: p 126).

And: “The terrible truth with which we must all contend is that the day may come when nuclear arms fall under the control of some idiot someplace in the world. And that will be the day of reckoning.”

How prescient of Galbraith about what we might face if such a ‘idiot’ were to be walking the planet right now?

Read Galbraith’s short article, first published in 2003 at: http://www.esquire.com/features/learned/060501_mwi_galbraith.html

The One True Republic of Letters

Good writing is associated with both Milton Friedman and John Galbraith and in the aftermath of the death of Galbraith in his 90s, this short essay by Professor Jim Heskett deserves a wide readership. It is an excellent example of how to explain fairly complex ideas to non-economists (and, indeed some economists) without diluting their power with concessions to brutal simplicity.

It also reminds us that the quartet mentioned, of Galbraith, Friedman, Keynes and Smith were each in their own way great explicators of their ideas on how their economies worked. If they wanted to gain and keep the attention of the people who made decisions about the degree of interference in the economy, for good and ill, they had to write clearly (preferably with ‘perspicuity’, as Smith advised his students in his lectures on Rhetoric and Belles Lettres in Edinburgh and Glasgow between 1749-63).

Whatever stance you take on the different policy issues represented by Galbraith and Friedman, I was struck by the anecdotal reference that the “Friedman's occasionally vacationed with the Galbraith's at the latter's Vermont farm, according to biographer Richard Parker” (in John Kenneth Galbraith: His Life, His Politics, His Economics (New York: Farrar, Straus, and Giroux, 2005). As a student I attended a lecture given by Milton Friedman in the late 60s at the University of Strathclyde at the height of controversy about his advocacy of economic policies to deal with inflation and he opened with his greetings to fellow citizens of the ‘Republic of Letters – the one true republic’. I think this defused the tension a great deal, enough at least to guarantee him a hearing from an audience containing among it what can only be described as a ‘hostile ’ minority from the largely leftwing faculty. It was the first time I heard the Republic of Letters invoked, though I have heard it many times since, the notion of the Galbraith’s and the Friedman’s vacationing together in peace and harmony as members of that Republic is a great example of the mutual respect that great minds show towards candidate members of the Republic learning to learn and not to hurl abuse in place of understanding.

Jim Heskett writes:

“With the death of John Kenneth Galbraith on April 29, it is perhaps appropriate to reflect about the influence of two economists, Galbraith and Milton Friedman, described by Time magazine in 1975 as the modern world's most important economists along with Alfred [sic]Keynes and Adam Smith. There were remarkable similarities between them. Both strongly influenced government policy. Both wrote prolifically, and for a broader audience than just theoretical economists. Both, of course, lived to see the age of ninety and then some. And despite their sharply contrasting views of political economics (Friedman regarded Galbraith as a socialist), the Friedman's occasionally vacationed with the Galbraith's at the latter's Vermont farm, according to biographer Richard Parker.Galbraith, in his book The Affluent Society, argued for the importance of fiscal policy in influencing the allocation of resources between rich and poor. This was to be done through the maintenance of a progressive tax system to insure that the wealthy provided their proportionate share of funding to enable government to channel funds to such endeavors as the environment, support for the poor, and the development of the arts. The objective was to create a society that would provide a better standard of living for all.Friedman, on the other hand, in a book Free to Choose, advocated a minimalist role for government, relying instead on lower tax rates to provide the wherewithal for Americans to decide for themselves how they wished to live and spend their increased take-home pay. In another work coauthored with Anna Jacobson Schwartz, The Monetary History of the United States, he had earlier argued, however, for a significant government role in managing monetary policy to guard against the booms and busts that characterized the early part of the twentieth century. According to this thesis, by regulating the supply of money, governments could have an immediate and important impact on such things as interest rates, inflation, and general economic prosperity. “

From: “Who Will Cast a Longer Shadow on the 21st Century: Friedman or Galbraith? by Professor Jim Heskett.

I wonder how many in that audience have since changed their minds of the certainties they held about inflation, Keynesian macro-economics and the perfidious intentions of Milton Friedman?